Revisiting the Myths of the Dot-Com Boom

For those of us around long enough to remember — and for those familiar with the legend — the dot-com era of wildly speculative initial public offerings, ill-fitted mergers and acquisitions and office masseuses seems like a painful lesson about capitalism run amok.

Today’s boom, we’re told by influencers such as venture capitalist Marc Andreessen, is much different. The companies are on solid financial footing and have sales. The deals are either immediately productive or, at the very least, reasonable, affordable gambles.
Mr. Andreesson’s firm, Andreesen Horowitz is doubling down on the assessment. It just raised $1.5 billion on a fourth fund for startups.

“We’re not in a bubble and there is no frenzy,” said Scott Kupor an Andreesen Horowitz managing partner on Thursday.

It’s a view that’s reinforced by some recent research. In January, University of Florida finance professor Jay Ritter published a paper that highlighted the valuation differences between the dot-com IPO boom and today’s environment.

Mr. Ritter’s is one of the voices that’s drawing a distinction between the bad bubble of yesteryear and the companies going public today that have “demonstrated an ability to generate sales, and with the exception of Twitter, profits,” he told the Journal in October.

But take a step back from both eras, I’d offer that the bad times of yesteryear weren’t that bad and that the good times of today aren’t that good.

Take, for instance, the myth that the majority companies that debuted in that era, roughly from the late 1990s to the early 2000s, struggled, underperformed and, most vividly remembered, went belly up.

While it’s true the list of failures from that era is long—delivery services such as Webvan, Kosmo.com, eToys and pets.com, to name a few—the list of successes is impressive: Amazon.com Inc., eBay Inc., Yahoo Inc. They’re not only still around, but have returned huge sums to investors even using the benchmark of their heady initial valuations (Amazon is up 19,000%, Yahoo, 2,500%, eBay 2,885%)

Likewise, today’s myth that companies are coming to market with more reasonable valuations, a point Mr. Ritter tries to make, is questionable. While Twitter Inc., LinkedIn Corp. and, after a rough start, Facebook Inc. have delivered on their promised profit growth and stock performance, there have been some notable flops: online game maker Zynga Inc., Chinese networking website Renren Inc., daily deal website Groupon Inc. and online services marketplace Angie’s List Inc.

All of them jumped out of the gate and eventually struggled to regain their initial valuations. (Zynga is down 51%, Renren, 12.9%, Groupon, 66%, Angie’s List, 23%).

Another main myth about the dot-bomb era is the deals. Everyone points to AOL Inc.’s acquisition of Time Warner Inc. —with its massive job losses, disastrous stock performance and unrealized synergies—as the textbook example of poor deal making in business schools. But many mergers turned out OK.

Microsoft Inc. bought Hotmail in 1997 for $400 million. It was a little expensive, but gave Microsoft an essential email capability it was lacking. Online auction house EBay bought payment systems PayPal Inc. for $1.5 billion in 2002. Both those deals look fairly prescient today.

Time will tell, but it’s doubtful all of today’s deals will stand up as beneficial to investors. Facebook, for instance, has spent $22 billion on photo sharing service Instagram, text messenger service What’s App and now, virtual reality headgear maker Oculus. That’s a lot of money to recover from three companies that so far haven’t generated profits. Microsoft Inc. took a big gamble in buying Nokia Corp.’s phone business for $7.2 billion last year. Google Inc. bought Motorola Inc.’s handset business for $12.3 billion two years ago and then sold it to Lenovo Group Inc. for $2.91 billion in January. Google kept some valuable patents, but that’s a striking loss in value nonetheless.

As these deals and offerings show, each era has been marked by expensive risk taking. Some have paid off. Some haven’t. But labeling the dot-com era as bad and today’s era as good oversimplifies the situation and ignores the nature of technology in the markets. Selling pet supplies or pizzas over the Internet aren’t bad ideas in themselves. But they can seem like bad ideas depending on the myths we’ve created around them.

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